The effects of monetary policy on exchange rates: a high frequency identification

Details

Supervisors

Monti, Francesca

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

This thesis examines the effects of monetary policy on expected exchange rates using a high-frequency identification approach. It focuses on distinguishing the impacts of the press release and the press conference stages of European Central Bank monetary events on the EUR-USD exchange rate. The purpose of the study is to demonstrate that the press release and the press conference are two uncorrelated shocks. The methodology involves constructing a two-component instrument using uncovered interest rate parity to capture the expected exchange rate fluctuations during the press release window, then the press conference window. After that, a vector autoregressive model (VAR) combined with a generalized autoregressive conditional heteroskedasticity (GARCH) is performed to understand the impact of the instrument on financial markets, and orthogonalized impulse response functions are used to isolate the effects of these two shocks. Results show the press release and press conference generate distinct and uncorrelated effects on expected exchange rates that do not behave the same way over time. The first effect is due to the monetary policy, while the press conference shows an immediate surprise effect due to the unanticipated disclosed information.